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November 27, 2013

Buffett’s Bank Bets Are on the Money: Report

Warren Buffett’s Berkshire Hathaway (BRKA) has ticked up more than 15.6% since the end of the second quarter, topping the major indexes. And, according to a report released by SNL Financial on Tuesday, the investor’s stakes in U.S financial services firms has a lot to do with this stellar performance.

From July 1 to Nov. 21, for instance, the value of Berkshire’s U.S. financial services portfolio was $42.7 billion, an increase of about $5.8 billion, or 15.6%, since the end of the second quarter. Year to date, Berkshire Hathaway has improved about 30%.

That puts its 2013 performance just slightly below that of its new holdings in Goldman Sachs (GS) and slightly above its older interest in Wells Fargo (WFC). And Berkshire, GS and WFC are outperforming both the S&P 500 and the Dow Jones so far this year.

That performance is somewhat ironic given the latest earnings news. In the third quarter, Goldman Sachs’ net income was basically flat, ticking up just 1% to $1.52 billion, or $2.88 a share, vs. $1.51 billion, or $2.85, a year ago. These results beat estimates, but net revenue fell way short of expectations.

Wells Fargo came in ninth. Its net income rose 13% year over year in the third quarter, but it had a 42% drop in its mortgage banking income. It made $80 billion in home loans, down from $139 billion last year, and mortgage.

SNL Financial says Berkshire's streak of gathering shares in WFC came to an end in the third quarter, after nine consecutive quarters of accumulations. Still, Wells represents the biggest stake in the portfolio, at 21%.

During the third quarter, Buffett received some 13.1 million shares of Goldman Sachs, valued at more than $2 billion, or a 2.88% stake in the broker-dealer in a cashless transaction, according to the research group, as part of a warrant agreement made during the financial crisis.

The deal gave Berkshire the right to buy 43.5 million shares at an exercise price of $115 per share or $5 billion in total. Plus, an amended agreement allowed Buffett to redeem the warrants for shares of Goldman at a value equal to the difference between the exercise price and the average closing price in the 10 trading days leading up to Oct. 1.

“All told, Berkshire's U.S. financial institutions portfolio composed nearly 46% of its total stock portfolio, which was worth close to $94 billion,” SNL noted.

For those looking to invest like Buffett but with a less concentrated portfolio of financial stocks, the Financial Select Sector SPDR (XLF) is up 31% year to date, very close to the performance of Goldman and Wells. From July 1 to Nov. 21, however, it didn’t keep up with Berkshire’s financial holdings and improved just 9.8%.

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